The trendline breakout forex trading strategy is based on the idea that when price breaks a trendline, the trend has “potentially” changed.
So what this means is that if you spot price break a downward trendline, then that means that an uptrend has started so you should look to buy.
The opposite is also true: if you see that price has broken an upward trendline, that means the the downtrend has started so you should sell.
Currency Pairs: Any
Indicators: no indicators required as this is a price action trading system that just uses candlesticks.
HOW TO DRAW TRENDLINES
For a market in a downtrend, price will be forming peaks of decreasing height. Its these decreasing height peaks that you need to use to draw the downward trendline.
For downward trendlines you connect a minimum of two lower swing highs and draw a line and that forms your downward trendline.
For a market in an uptrend, price will be forming low of increasing heights. There are the lows that you use to draw upward trendline.
So you need to connect at least two higher swing lows and you would have an upward trendline.
Click this link if you wan’t to know more about how to draw trend lines.
When you see price breaks a trendline, it is usually an early signal that a trend may be changing. So will wait for the candlestick close below or above a trendline before you place your order.
For the buying and selling rules below, refer to this chart.
- The market will be in a downtrend and you have to find two points to draw a falling/downward trendline
- Wait for price to intersect this trendline and make sure the intersecting candlestick closes above it.
- Next thing you do is to place a pending buy stop order 2-3 above the high of the candlestick that intersected the trendline and closed above it.
- For you stop loss, place it 2-5 pips below the low of that intersecting candlestick
- You can set a profit target on previous swing high or you can exit your trade when the the opposite trendline is intersected and breached.
- The market will be in a uptrend and you have to find two points to draw a rising trendline
- Wait for price to intersect this trendline and make sure the intersecting candlestick closes below it.
- Next thing you do is to place a pending sell stop order 2-3 below the low of the candlestick
- For you stop loss, place it 2-5 pips above the high of that intersecting candlestick
- You can set a profit target on previous swing low or you can exit your trade when the the opposite trendline is intersected and breached.
Here are some trade management techniques which you can use:
- If your trade goes well then use trailing stop to lock in your profits in case the market reverses and all that effort will be wasted
- The best trailing stop technique will be to place above a swing high point for a sell order and below a swing low point for a sell order.
- if price moves by the amount risked, move stop loss to breakeven.
- consider taking half of the profit off if price moves twice the amount risked.
DISADVANTAGES OF THE TRENDLINE BREAK FOREX TRADING STRATEGY
- there will be times when there will be false trendline breaks so just be aware of it and expect it.
- sometimes, the candlestick that breaks the trendline is very long which increases your stop loss distance. In such a case, don’t bother trading at all or if you do decide to trade, consider minimizing your trading risk with position sizing based on the stop loss distance.
ADVANTAGES OF THE TRENDLINE BREAK FOREX TRADING STRATEGY
- its simply price action trading
- its a very powerful forex trading strategy if used correctly.
- can be applied to all timeframes.
- can allow you to catch the start of the trend at just about the beginning and ride it out for maximum profit extraction
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